Sterling remains pressured by euro; investors focus on UK CPI

Tom Tong22/Mar/2011Currency Updates

GBP

Sterling reached a two week high against the dollar yesterday but remained under pressure from a buoyant euro. Sterling benefitted from continued dollar weakness and anticipation by traders that an upside print in the CPI figures today will stoke the fires for rate hikes sooner rather than later. Market sentiment suggests that annual CPI will rise to 4.2% in the month of February from a figure of 4% in January, increasing expectations that the BoE will follow the lead of the ECB in increasing rates in the next few months. Looking at the futures market, a rate hike in August is already priced in, but surprises to the upside could provide a short term boost to sterling as speculators look to profit from hikes prior to August. Another key watershed this week will come on Wednesday as the BoE minutes from the last meeting are revealed, with everyone keen to see if more MPC members have moved into the hawkish camp, and George Osborne will be revealing the new budget.

USD

Meanwhile, the dollar was battling on all fronts as it lost ground against sterling and the euro with the dollar index dropping to a 15-month low against a basket of six most traded currencies due to a spike in risk sentiment. Investors moved out of the dollar and into riskier trades as the worries in Japan and Libya began to dissipate. The greenback also suffered as investors looked to leveraged risk trades in undervalued stocks, after the recent crashes, and also commodity linked currencies. The dollar’s current weakness is being blamed partially on the longer term expectations that the Fed will continue its support for ultra-loose policy, keeping rates low, meaning that the USD is a perfect partner in carry trades with it being safe to borrow USD and look for a higher yielding pair. The only economic data of any relevance to come out of the US today will be new home sales figures at 14:00.

EUR

The euro continued its recent momentum against the dollar, reaching highs not seen since November and also kept up pressure on sterling, trading at new lows for the month. This momentum is being underpinned by a continued chorus over the dangers of inflation coming from key European figures and their continued intention to raise rates.  The euro is also benefiting from renewed investor confidence in the currency block as a Eurozone finance ministers meeting yesterday in Brussels sealed an agreement on funding of a new safety net for the bloc, but left it to a summit of EU leaders later in the week to work out a deal with Ireland on debt relief and on the forging of a compromise on boosting an existing rescue facility. Additionally, the risk premium required to hold 10 year Spanish debt has narrowed to its lowest levels since February.

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Written by Tom Tong

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